More of this Feature • Lesson 3 Main • How to Get Copies • What is it? • Typical Balance Sheet • Current Assets • Receivables • Receivable Turns • Inventory • Inventory Turns • Inventory Example • Prepaid Expenses • Current Liabilities • Working Capital • WC Per Dollar of Sales • Negative Work. Cap • Current Ratio • Quick Ratio • Long Term Investment • Property, Plant, Equip. • Intangible Assets • Goodwill • Deferred Charges • Debt, Debt to Equity • Other Liabilities • Minority Interest • Shareholder Equity • Book Value • Com. & Pref. Shares • Cap. Surplus, Reserve • Treasury Stock • Retained Earnings • Formula & Calculations • Putting it all Together • Segment 2

Related Resources • Investing Lesson 1 • Investing Lesson 2 • Investing Lesson 3 • More Lessons

Working Capital per Dollar of Sales

To find the approximate amount of working capital a company should have, you should look at "working capital per dollar of sales."  In other words, you are going to have to compare the amount of working capital on the balance sheet to the total sales (which is found on the income statement - not the balance sheet).  A business that sells a lot of low-cost items, and cycles through its inventory rapidly (a grocery store) may only need 10-15% of working capital per dollar of sales.  A manufacturer of heavy machinery and high-priced items with a slower inventory turn may require 20-25% working capital per dollar of sales.  A company such as Coca Cola would probably fall somewhere between the two.

Here's the formula for Working Capital per Dollar of Sales

Working Capital
-------------------------(divided by)---------------------------
Total Sales (Found on the Income Statement)

Let's look at an example:

          Goodrich, Inc. (Symbol GR)
          Goodrich provides systems for aircraft as well as manufacturers heavy-duty engines.
          Working Capital: $933,000,000 (current assets - current liabilities)
          Total Sales (found on the income statement) = $4,363,800,000

Let's plug the numbers into the formula:

Working Capital = $933,000,000
-------------------------(divided by)---------------------------
Total Sales (Found on the Income Statement) = $4,363,800,000

The answer for Goodrich is .2138, or 21.38%.  As a manufacturer of heavy duty machinery, GR falls within the 20-25% working capital per dollar of sales range.  This is good.

Next page > Negative Working Capital & Buying a Company For Free >  << back 14, 15, 16, 17, 18, 19, 20 more >>